Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Lowest PEmg Comapnies for Defensive Investors. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Chevron Corporation (CVX) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Chevron Corporation (Chevron) manages its investments in subsidiaries and affiliates and provides administrative, financial, management and technology support to the United States and international subsidiaries that engage in fully integrated petroleum operations, chemicals operations, mining activities, power generation and energy services. Upstream operations consist primarily of exploring for, developing and producing crude oil and natural gas; processing, transportation and regasification associated with liquefied natural gas; transporting crude oil by international oil export pipelines; transporting, storage and marketing of natural gas, and a gas-to-liquids project. Downstream operations consist primarily of refining crude oil into petroleum products; transporting crude oil and refined products by pipeline, marine vessel, motor equipment and rail car, and manufacturing and marketing of commodity petrochemicals, plastics for industrial uses and fuel and lubricant additives.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 6/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
- Moderate PEmg ratio – PEmg is less than 20 – PASS
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|Value Based on 3% Growth||$161.93|
|Value Based on 0% Growth||$94.92|
|Market Implied Growth Rate||1.27%|
|Net Current Asset Value (NCAV)||-$30.38|
Balance Sheet – 3/31/2014
Earnings Per Share
Earnings Per Share – ModernGraham
Chevron Corporation qualifies for both Defensive Investors and Enterprising Investors. The Defensive Investor is only concerned with the low current ratio, and the company by default also qualifies for the Enterprising Investor. As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and its competitors through a review of ModernGraham’s valuation of Exxon Mobil (XOM) and ModernGraham’s valuation of Conoco Philips (COP). From a valuation side of things, the company appears undervalued after growing its EPSmg (normalized earnings) from $8.58 in 2010 to an estimated $11.17 in 2014. This level of demonstrated growth outpaces the market’s implied estimate of 1.27% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is well above the price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. What do you think? What value would you put on Chevron Corporation (CVX)? Where do you see the company going in the future? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Be sure to review the previous ModernGraham Valuations of Chevron Corporation (CVX)!
Disclaimer: The author did not hold a position in Chevron Corporation (CVX) at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from wikipedia; this article is not affiliated with the company in any manner.